Fox Logistics v. United States: Federal Circuit Questions Government in Air Force Subcontractor Payment Case

On April 7, 2026, a three-judge panel of the United States Court of Appeals for the Federal Circuit heard oral argument in Fox Logistics and Construction Co. v. United States, Case No. 24-2150, a case that could shape how subcontractors recover payment when the federal government steps in to manage a failing prime contractor's finances on a military construction project.

Hal Emalfarb of Emalfarb Law LLC argued the appeal on behalf of Fox Logistics and Construction Co., the subcontractor seeking to recover more than three million dollars in unpaid construction work performed at Shindand Air Base in Afghanistan. You can read the full Court of Federal Claims opinion here.

Background: A Massive Infrastructure Project in a War Zone

Fox Logistics and Construction Company, a contractor based in Kabul, Afghanistan, was awarded Subcontract PO07684 by Lakeshore Engineering Services Inc., a Michigan-based prime contractor, to perform construction work under Task Order No. 42, which the U.S. Air Force had awarded Lakeshore under Federal Prime Contract FA8903-06-D-8505. The scope of work included construction of the Afghan Air Force Expansion at Shindand Air Wing Phase II, Air Traffic Control and Landing Systems, and Central Utilities for Afghan National Security Forces at Shindand Air Base in Herat Province, Afghanistan.

Fox's subcontract was substantial. After Change Order No. 0001 in January 2013, the subcontract value increased to nearly forty million dollars. Fox was performing much, if not most, of the actual construction work on the ground. But despite the scale of Fox's contribution, it remained contractually a subcontractor, its deal was with Lakeshore, not the Air Force.

The Payment Crisis Begins

By April 2013, Fox was forced to cease work because Lakeshore had stopped paying its invoices. The Air Force was well aware of the problem. On May 29, 2013, the Air Force sent Lakeshore a Cure Notice stating that the project was on a 40-day work stoppage, was scheduled to be 60 percent complete but was only 13 percent complete, and that Lakeshore had fallen four to five months behind on subcontractor invoices, even though the government had paid Lakeshore in full for all completed work.

Lakeshore promised to fix its cash flow problems, hired new management, and claimed it had resolved all financial issues. The Air Force allowed work to resume. But the problems returned almost immediately. By September 2013, the Air Force sent Lakeshore a memorandum on Non-Payment of Subcontractors, noting that six subcontractors, including Fox, had not been paid in over 30 days. The memorandum warned Lakeshore that its prior certifications of payment to subcontractors may have been false or fraudulent, and demanded proof of payment within four calendar days or face civil or criminal remedies.

Lakeshore briefly became current on payments, and Fox increased production. But by the end of 2013, Fox was again running out of materials and funds on site. Fox's Director General, Mushtaq Habibi, personally contacted Air Force officials to explain that Fox saw no success in getting funds from Lakeshore, which had multiple financial gaps and was diverting money to other projects. Despite the payment crisis, Habibi emphasized that Fox was still trying to move forward with the project.

The Special Account Arrangement

In January 2014, after yet another Show Cause Notice from the Air Force, Lakeshore proposed establishing a special bank account to segregate all funds related to Task Order 42. Under the proposal, the Air Force would deposit future payments into this designated account, Lakeshore would not withdraw funds for corporate overhead or profit, and the Air Force would have full viewing rights to monitor all transactions.

The Air Force Contracting Officer, Captain Rebecca Ban, agreed to the arrangement. She directed Lakeshore to create payment plans for each subcontractor, signed by the subcontractor, detailing amounts owed, amounts being paid, and the timeline for bringing accounts current. Critically, Captain Ban warned Lakeshore that if transactions did not occur in accordance with the approved payment certifications, the task order would be immediately terminated for default.

Fox agreed to the payment plan in February 2014 and returned to work. Fox subsequently received four payments totaling approximately four million dollars. But after the last payment in late April 2014, the arrears to Fox began increasing again with each billing cycle.

Bankruptcy and Abandonment

On or about May 1, 2014, Lakeshore declared Chapter 7 bankruptcy and abandoned the project. At the time, Lakeshore owed Fox more than three million dollars for completed work. Fox alleges it has incurred more than eight million dollars in uncompensated expenses since Lakeshore's abandonment. An Air Force officer later estimated that Lakeshore had deliberately underbid numerous task orders in its final months of solvency in order to leverage its subcontractors' credit capacity, invoice large quantities of work, receive payment, and then declare bankruptcy.

Fox attempted to recover through Lakeshore's bankruptcy proceeding without success, then filed a certified claim directly with the Air Force Contracting Officer. Captain Ban denied the claim, stating that the Air Force did not have a contract with Fox.

Six Years of Litigation in the Court of Federal Claims

Fox filed suit in the U.S. Court of Federal Claims on September 13, 2018, Case No. 18-1395 C, advancing two legal theories: that Fox had an implied-in-fact contract with the government, and that Fox was a third-party beneficiary of the prime contract as modified by the February 2014 special account arrangement.

The case has had a complex procedural history. The government initially moved to dismiss for lack of jurisdiction. In a 2019 opinion, Judge Wheeler found that Fox had raised non-frivolous claims on both theories and granted limited jurisdictional discovery. The government renewed its dismissal motion, the court ordered supplemental briefing in light of the Federal Circuit's 2021 decision in Columbus Regional Hospital v. United States, and the government ultimately withdrew its motion. Full fact discovery followed, and both sides filed cross-motions for summary judgment.

On May 31, 2024, Judge Edward H. Meyers granted summary judgment for the government on both claims. On the implied-in-fact contract theory, the court found no mutuality of intent, the Air Force had considered contracting directly with Fox but decided not to, and Fox returned to work knowing that the Air Force had rejected its demands for direct payment. On the third-party beneficiary theory, the court concluded that the February 2014 payment arrangement did not alter the fundamental payment structure: the Air Force still paid Lakeshore, and Lakeshore was still responsible for paying Fox. The court found that the additional safeguards, the special account, viewing rights, and subcontractor-signed payment plans, were exercises of the Contracting Officer's existing authority under FAR 52.232-5, not modifications creating new beneficiary rights.

You can read the full Court of Federal Claims opinion here.

The Federal Circuit Hearing

Fox appealed to the Federal Circuit, and on April 7, 2026, the three-judge panel, U.S. Circuit Judges Kimberly A. Moore and Sharon Prost, along with U.S. District Judge Richard Seeborg of the Northern District of California, sitting by designation, heard oral argument on whether the lower court erred.

Circuit Judge Moore appeared skeptical of the government's position. She noted that Fox had performed work that the government undisputedly wanted completed, and that the Air Force seemed to take issue with how the claim for payment was submitted rather than the substance of the claim itself. The judge asked whether the government was concerned about the chilling effect on contractors' willingness to perform work when payment disputes are resolved on procedural grounds rather than on the merits.

The government, represented by attorneys from the U.S. Department of Justice Civil Division, responded that its position was a consequence of existing contract law and the choices the contracting officer made under that law. The government maintained that the court below had correctly ruled that Fox could not qualify as a third-party beneficiary and could not secure payment from the special account.

Emalfarb countered by pointing to the Federal Circuit's own 2005 decision in Flexfab LLC v. United States, in which the court held that subcontractors have standing to sue the government as third-party beneficiaries when the contracting officer directly intended to benefit the subcontractor through an indirect payment mechanism. Emalfarb argued that the government and Lakeshore all expected the money to go to Fox, Lakeshore had zero entitlement to the funds in the special account, and that the circumstances in this case were analogous to those the court recognized in Flexfab.

Why This Case Matters for Subcontractors

The Fox Logistics case sits at the intersection of several critical legal principles in federal government contracting:

• Third-Party Beneficiary Doctrine: Federal courts have historically been reluctant to allow subcontractors to sue the government directly, since privity of contract generally exists only between the government and the prime contractor. The Flexfab decision carved out a narrow exception, and the Fox case could either reinforce or expand that exception depending on how the Federal Circuit views the special account arrangement.

• Special Payment Accounts: When the government intervenes in a prime contractor's payment process, particularly by creating accounts earmarked for subcontractor payments, requiring subcontractor-signed payment plans, and threatening immediate termination for non-compliance, the legal question of who benefits from that arrangement becomes critical. A ruling in Fox's favor could strengthen subcontractor protections in similar situations across all federal construction projects.

• Bankruptcy Risk: The case highlights the vulnerability subcontractors face when a prime contractor becomes insolvent. Without direct recourse against the government, subcontractors on federal projects can be left with worthless claims against a bankrupt estate, even when the government itself recognized the payment problem, attempted to address it, and knew the prime contractor was filing false payment certifications.

Implications for Illinois Contractors Working on Federal Projects

While this case arises under federal law and the Contract Disputes Act rather than the Illinois Mechanics Lien Act, it carries significant implications for Illinois-based contractors and subcontractors who perform work on federal projects. Federal property cannot be liened under state mechanic lien statutes, which means subcontractors on federal projects must rely on the Miller Act payment bond or contract-based remedies to get paid.

When the prime contractor goes bankrupt and there is no payment bond to claim against, or the bond is insufficient, subcontractors are left exploring alternative theories of recovery, including third-party beneficiary claims of the kind at issue in Fox Logistics.

The case also underscores a broader lesson that applies equally to state and federal projects: subcontractors must take affirmative steps to protect their payment rights from the outset. On private Illinois projects, that means serving timely Section 24 notices and recording mechanic liens within the statutory deadlines. On federal projects, it means understanding the prime contract structure, monitoring payment flows, and asserting claims early rather than waiting for the prime contractor's financial problems to become unmanageable.

What Happens When a Federal Project Has No Payment Bond and the Prime Files Chapter 7

The Fox Logistics case illustrates the worst-case scenario for a subcontractor on a federal project: the prime contractor goes bankrupt, and there is no payment bond to fall back on. On most federal construction contracts exceeding one hundred fifty thousand dollars, the Miller Act (40 U.S.C. 3131-3134) requires the prime contractor to post both a performance bond and a payment bond. The payment bond is the subcontractor's primary safety net, it guarantees that if the prime contractor fails to pay, the surety that issued the bond will cover the subcontractor's claim.

But not every federal project carries a Miller Act bond. Certain task order contracts, overseas military construction projects, and contracts below the statutory threshold may not require bonding. In some cases, the contracting officer may waive the bonding requirement altogether. When that happens, subcontractors are left without the one federal remedy specifically designed to protect them.

When an unbonded prime contractor files Chapter 7 bankruptcy, a liquidation proceeding, not a reorganization, the consequences for subcontractors are severe:

• Unsecured creditor status. A subcontractor's claim for unpaid work is typically classified as a general unsecured claim in the bankruptcy estate. General unsecured creditors are among the last to be paid in a Chapter 7 distribution, behind secured creditors, administrative expenses, and priority claims. In many Chapter 7 cases, there are insufficient assets to pay unsecured creditors anything at all.

• No lien rights on federal property. Unlike private construction projects in Illinois, where a subcontractor can record a mechanic lien against the improved property, federal property is immune from state lien statutes. The Miller Act payment bond was created precisely because Congress recognized that subcontractors cannot lien government land. Without the bond, the subcontractor has no security interest in anything.

• No direct claim against the government (ordinarily). The federal government's contractual relationship is with the prime contractor, not the subcontractor. Under the doctrine of privity of contract, the government generally cannot be sued by a party with which it has no contract. This is exactly the wall that Fox Logistics ran into, the Air Force's position was that it owed Fox nothing because Fox's contract was with Lakeshore.

• Limited alternative theories. Without a bond and without privity, a subcontractor on an unbonded federal project is left with narrow and difficult legal theories: implied-in-fact contract (requiring proof that the government effectively agreed to deal directly with the subcontractor) or third-party beneficiary status (requiring proof that the government specifically intended to benefit the subcontractor through a contract modification). Both theories face a heavy burden of proof, as the Fox Logistics litigation demonstrates.

The practical takeaway for any subcontractor considering work on a federal project is straightforward: before you sign the subcontract, find out whether the prime contractor has posted a Miller Act payment bond. If it has not, you need to understand that your only recourse if the prime goes under may be a bankruptcy claim worth pennies on the dollar, or a years-long legal battle to establish that the government itself owes you the money. That is not a reason to refuse the work, but it is a reason to negotiate stronger contractual protections, require advance payments or milestone-based funding, and monitor the prime contractor's financial health closely throughout the project.

Over a Decade of Persistence: Seeing the Fight Through

The timeline of this case tells its own story. Fox began performing infrastructure work at Shindand Air Base in late 2012. By April 2013, Fox was forced to stop work due to non-payment. The payment crises continued through 2013 and into 2014, requiring repeated Air Force intervention, cure notices, show cause notices, memoranda threatening criminal referral for false certifications, and ultimately the creation of the special account arrangement. Lakeshore abandoned the project and declared bankruptcy in May 2014. Fox pursued recovery through Lakeshore's bankruptcy without success. Fox submitted its certified claim to the Air Force in May 2017. When the contracting officer denied the claim, Fox filed suit in the Court of Federal Claims in September 2018. The lower court ruled against Fox in May 2024 after years of jurisdictional battles and fact discovery, and Fox appealed to the Federal Circuit shortly after. By the time the three-judge panel heard oral argument on April 7, 2026, more than twelve years had passed since the work was performed and nearly eight years had elapsed since Fox first sought compensation from the government.

That kind of timeline would cause most parties to walk away. Construction payment disputes against the federal government are among the most complex and resource-intensive cases in the field. The government has virtually unlimited litigation resources, and cases that reach the Federal Circuit often involve years of briefing, motion practice, and procedural battles before a single judge hears oral argument.

Hal Emalfarb has represented Fox Logistics throughout this entire journey, from the initial certified claim through the jurisdictional fight, fact discovery, cross-motions for summary judgment in the Court of Federal Claims, and now the appeal before the Federal Circuit. It is the kind of sustained, determined advocacy that defines how Emalfarb Law LLC approaches every case. When a client has a legitimate claim and has performed the work, Hal does not abandon the fight because the road is long or the opponent is the United States government. He sees the matter through to the end.

That commitment matters in construction law. Payment disputes, whether on a federal military base in Afghanistan or a commercial project in Cook County, are won by attorneys who understand the law, master the facts, and refuse to give up when the process gets difficult. Fox Logistics performed tens of millions of dollars in construction work in a war zone. The government itself recognized that Fox needed to be paid, created a special account for that purpose, and threatened to terminate the prime contractor if subcontractor payments were not made. Hal Emalfarb is making sure the legal system delivers on that recognition.

About the Case

The case is Fox Logistics and Construction Co. v. United States, Case No. 24-2150, in the United States Court of Appeals for the Federal Circuit. The lower court opinion is Fox Logistics and Construction Co. v. United States, No. 18-1395 C (Fed. Cl. May 31, 2024). The Federal Circuit panel consists of U.S. Circuit Judges Kimberly A. Moore and Sharon Prost and U.S. District Judge Richard Seeborg. Fox is represented by Hal Emalfarb of Emalfarb Law LLC. The government is represented by attorneys from the U.S. Department of Justice Civil Division.

• Read the Court of Federal Claims Opinion (PDF)

A decision from the Federal Circuit is expected in the coming months. We will update this post when the opinion is issued.